Pandora's 40-hour listening cap translates to a record 700K new paid subscribers

Pandora took some heat after placing a 40-hour listening cap on its power users back in February, but the move apparently helped the company. Instead of fleeing the service for competitors, users decided to subscribe in order to keep listening to more music.

The company has added over 700,000 new subscribers to its paid Pandora One service, it revealed in its fiscal year 2014 Q1 earnings report yesterday. The company now has 2.5 million paid subscribers, and the increase for the quarter is more than it added during the entire previous year. Pandora attributes the subscriber growth largely to both the listening hour cap and Android enabling in-app purchasing of Pandora One on mobile devices.

The subscription growth is interesting because it seemed like the listening cap, which was put in place to help Pandora control its content licensing costs, would send some of its users into the arms of competitors. Slacker Radio told us it saw a huge boost in new user registrations after Pandora rolled out its cap policy. But having heard outgoing CEO Joe Kennedy’s explanation on the earnings call, I can understand Pandora’s logic for the cap: The average Pandora user listens to about 20 hours of music per week and is far more valuable from an advertising revenue standpoint than the user who consumes twice that amount of music.

Regardless of the paid subscriber boost, the company said it’s still firmly committed to focusing on its free, ad-supported service.

“We don’t look at [Pandora One] purely as a subscription service but rather as a paid option for our users that’s almost like a feature addition instead of a business line,” Kennedy said during the earnings call. “We will be thinking a lot about in-app purchasing behavior, especially on Android. It’s changed the dynamic of how people look at paid listening as a preferred option.”

Pandora also reported a record number of listener hours, which hit 4.2 billion for the quarter (a 35 percent increase over the same period last year), a 55 percent year-over-year increase in revenue to $125.5 million, and a larger share of all U.S. radio listening to 7.83 percent (compared to 5.86 percent last year). Investors responded positively to the earnings, too — pushing the stock price up nearly 9 percent to $18.68 a share in after hours trading.